Once hawkish, the now dovish Fed has an about-face when it comes to interest rates.

Historical Context

At the end of 2017 the Federal Reserve finally raised rates from their 0% lows. Throughout 2018, the Fed was extremely hawkish. They put the pedal down increasing interest rates from 1.25% to 2.5%. In the 4th quarter of 2018, the Fed outlined that it would continue on its course; affirming it would raise rates at least 3 to 4 times in 2019.

That was until 2018’s 4th quarter metrics came to light. The 4th quarter was one of the worst quarters since the Great Recession and December’s numbers were the worst since 1931 (the Great Depression) in regards to the stock market’s performance.

The major stock indices (NASDAQ, DOW, S&P 500) each experienced nearly 20% drops. As an example, “at its low price on Christmas Eve, the S&P 500 was down more than 20 percent from its record high on an intraday basis, briefly meeting the requirement for a bear market.” [1] (Though, one should note that the Dow jumped more than 1,000 points on December 26th – it’s biggest ever point gain).

This wild market volatility is certainly not indicative of a healthy stock market.

The Trump tax cuts fueled 2018’s stock market bullish behavior as companies used those tax cuts – and debt at still historically low-interest rates – to buy back more and more of their own shares. This led to an over-valued stock market valuation and an increase of corporate debt in a temporary environment which would eventually break down by such behavior.

It was near the end of 2018 where the U.S. began to experience the beginning of the end.

The Early 2019 Economic Landscape

Throughout January of 2019, the market has experienced turbulence – volatility in both the stock and bond markets – as uncertainty is felt among investors. Additionally, the tax reform impact is waning rapidly resulting in a global slowdown. The ‘system’ has adapted to the tax landscape, soaked it dry, and is no longer providing growth.

Furthermore, the increases in interest rates have put a strain on financial institutions. These higher interest rates deter consumers from utilizing financial instruments – like mortgages – as the costs are increasing. The total mortgage application volume is down 16 percent compared to 2017. [2]

With “seemingly constant chaos in Washington, recent turmoil in markets, and an expansion that’s about to be the longest on record, businesses [and investors] are getting nervous.” [3] The fact that the economy is strong right now is no shield against a recession. It is known that recessions typically start when the economy is at its peak and has nowhere to go but down.

It is these facts that make investors nervous as well as Jay Powell, the Chairman of the Federal Reserve; because the Fed is not yet in a position to deal with a recession. The interest rates are too low and the Fed’s balance sheet is too high to defer to rate cuts and QE to drive the economy out of a recession. The Fed tries to maintain grips on the economy but its sole purpose is to help financial institutions to maintain integrity. What happens when the interests of the two are not aligned?

The Federal Reserve’s Rhetoric

In anticipation of a rate hike in January, the stock market experienced severe price fluctuations. Additionally, as was noted by Danielle DiMartino Booth (a person to learn from), 2018’s earnings growth reports are coming in below rates of inflation. This is a huge red flag for Jay Powell and is remarkably similar to the reports back in 2007 before the Great Recession struck.

On January 30, 2019, Jay Powell announced a change in the Federal Reserve’s direction and roadmap for 2019. The Fed issued remarks such as [4]:

Common sense preaches patience. [Let us see what happens in the market]

The Fed will be patient in figuring out the next move. [Lower the likelihood of rate hikes]

The Fed is ready to adjust any details of the balance sheet plan [ahem – less QT and more QE]

The Fed will be patient in determining the rate hike path. The size of our balance sheet will be driven principally by the financial institutions’ demand.

The Fed’s change in position proves that the central banks cannot withdraw their extraordinary market subsidies. Tools such as Quantitative Easing (QE) to ‘print’ money and continue growing the stock bubble must continue. That in order to retain the stability the Fed seeks, it must first stop raising interest rates and then possibly cut them. That they must lessen Quantitative Tightening (QT) and possibly reinstitute QE to cater to the needs of the market.

And what happened as soon as these announcements were made? The stock market soared. It is addicted to cheap money akin to a drug user addicted to a pure drug rather than a diluted one. In order to stay alive, the user (or the market) needs to maintain a status quo or go into a severe withdraw that could potentially kill them otherwise.

All of these ‘fake’ bounces continue to lead to mal-investment, gross speculation, and a “kicking of the can” towards a tougher situation further down the road. The Federal Reserve checked into a monetary roach motel a long time ago and it is still there; they just still haven’t figured it out.

What the Other (People to Learn From) Have to Say

Peter Schiff

David Stockman

Lynette Zang

Conclusion

The Great Recession never truly ended. Instead, the asset bubbles were blown bigger than the bubble that popped and led people to believe that they were enjoying a recovery when, in fact, the bubbles that are currently on the edge of popping could destroy not just their life savings and retirement, but their livelihood as they know it.

The Federal Reserve is just as blind today as it was before the Great Recession. Eight months into the so-called “Great Recession” in 2008, many economists were still debating whether the economy was in fact in a recession. Recessions are backward-looking. Look forward, understand the landscape, and one can easily see the warning signs glaring them in the face.

]]>https://cloudofdoubt.com/2019/02/the-fed-capitulates-on-rate-hikes/feed/0The Bastardization of U.S. Equityhttps://cloudofdoubt.com/2019/01/the-bastardization-of-u-s-equity/
https://cloudofdoubt.com/2019/01/the-bastardization-of-u-s-equity/#respondThu, 24 Jan 2019 15:00:44 +0000http://cloudofdoubt.com/?p=1326The Grantham, Mayo, Van Otterloo (GMO) is a private partnership whose sole business is investment management. They recently released a white paper detailing their new model and how it indicates that the U.S. stock market bubble is bursting.

The Grantham, Mayo, Van Otterloo (GMO) is a private partnership whose sole business is investment management. They recently released a white paper detailing their new model and how it indicates that the U.S. stock market bubble is bursting.

Key Points

A new model suggests that from early 2017 through much of 2018, the U.S. stock market was a bubble.

Driven by negative changes in sentiment, the bubble started to deflate in the fourth quarter of 2018, in spite of strong fundamentals.

Our advice, consistent with our portfolio positions established in Q1 2018 – as usual, we were early – is to own as little U.S. equity as your career risk allows.

Introduction

In the fourth quarter of 2018, the S&P 500 fell almost 14%. This large price drop occurred in spite of a strong fundamental backdrop. Earnings per share (EPS) for 2018, much of it already locked in, is expected to be about $140, a 28% increase over 2017. And expectations for 2019 are for EPS of about $156, a 12% annual increase. With fundamentals so good, what explains the recent price action?

A new model – the Bubble Model – explains this dichotomy between price action and fundamentals by suggesting that a bubble in the U.S. stock market started inflating in early 2017, and continued to inflate through the third quarter of 2018. In the fourth quarter, however, indications were that the bubble had started to deflate.

And when bubbles deflate, they generally do so with a volatility bang. In this new model, bubbles are prone to form when times are good and expected to get even better. Good times today and even better times ahead are reflected in high valuations and solid fundamentals that continue to improve. Improving fundamentals lead to positive changes in sentiment, and these positive changes in sentiment fuel the bubble.

However, sentiment cannot increase forever. When change in sentiment – not level – inevitably turns negative as hopes of even better times ahead are dashed, there is nothing left to fuel the bubble…

While there are indications that the bubble started to deflate in the fourth quarter of 2018, and the magnitude of both price action and the change in the quantitative measure of euphoria that defines the Bubble Model suggests that the odds are now tilted in favor of the view that this is the beginning of the end of the bubble, we would be well-advised to remember Yogi Berra’s counsel that “It ain’t over till it’s over.”

Past bubbles do exhibit “head fakes” in which bubble deflation is interrupted by a secondary growth event. For example, in the third quarter of 1998, the time of the LTCM crisis, the Bubble Model suggested the bursting of the bubble that had started inflating in early 1997. However, the 1998 reading was a head fake, and the bubble continued to grow for another 18 months before finally popping in early 2000.

… The Bubble Model, which focuses on the dynamics of valuation, captures both the quantitative and anecdotal euphoric elements of a bubble. Euphoria manifests as explosive dynamics, expressed quantitatively as a negative mean reversion speed. Because the model is quantitative, it does not suffer from the subjective uncertainties inherent in anecdotal stories. While most of the time valuation is mean reverting, on rare occasions valuation is temporarily explosive, or mean averting. This mean aversion goes hand in hand with expensive valuation and is the defining characteristic of a bubble…

Exhibit 1: Valuation in 2018 Matched the Peak of 1929

Mean aversion, or explosive dynamics, arises when speculators dominate the market. Speculators are subject to fads and fashion and have a tendency to follow the herd. Their demand for stocks is ephemeral. Fundamental investors, on the other hand, assess value based on fundamentals and expected return considerations. Their demand for stocks is relatively stable. To the extent that fundamental investors dominate the market, fundamental value provides an anchor around which market prices vary. This is standard mean reversion.

However, when speculators dominate, i.e., the percentage change in speculative value exceeds that of fundamental value, then price tends to move away from fundamental value because deviations of price from fundamental value get relatively bigger. This is mean aversion.

…

Expansion

In short, what this means is that consumer confidence and sentiment play a huge role in the development of the markets. When there is backdoor manipulation of factors such as interest rates and quantitative easing/tightening by institutions and central banks such as the Federal Reserve, they are able to play a tune that will coax the market and market forces to bend to their will. In turn, this false sentiment can drive the market to change in a way that it would normally not.

Bubbles are prone to form when times are good (when the valuation of equity is high) and are expected to get even better (positive expected change in sentiment). Bubbles burst when hopes of even better times ahead are dashed. When these hopes are dashed, the positive change in sentiment turns negative. According to Tarlie, it is this flipping of the change in sentiment – not the level of sentiment – that drive the system back to a strongly mean-reverting phase. Furthermore, this change in sentiment from positive to negative will undoubtedly occur – as sentiment cannot keep growing forever – which makes the popping of the bubble guaranteed. [1]

How Does This Apply To 2018/2019?

Throughout 2018, the U.S. experienced the highest valuations in market history with the DOW, S&P 500, and NASDAQ reaching unprecedented levels. Yet, in the fourth quarter of 2018, things really started to change. The market fell dramatically despite fundamentals, both past and future, looking solid.

While as of December, 2018 expected EPS growth for 2019 is 12%, this is substantially below the 28% growth of 2018. Furthermore, since August, 2018 estimated EPS for 2019 has been revised downward by more than 4%. These changes, together with concerns about Federal Reserve tightening and trade tensions with China, point to negative changes in sentiment, a catalyst for popping a bubble.

Many claim that if people know a bubble is coming, why aren’t more people getting rich off it? Therein lies the problem. Bubbles are quite easy to recognize. Everyone understands to get in the market before the bubble takes off, ride it to the top, and exit before it pops.

Knowing that all bubbles pop when the overwhelmingly positive sentiment turns negative despite the outlook of increasingly positive sentiment is one thing, but to 1) know when a reversal is in fact a downward spiral and not a head-fake and 2) to be able to identify the correct catalyst for the change rather than the level of sentiment are the real obstacles.

The volatility is consistent with a bubble bursting, though we caution that it is possible that the fourth quarter move in the mean reversion speed could be a head fake. While the dramatic nature of the move in the mean reversion speed to such strong mean reversion suggests that the odds are tilted toward this being the beginning of the end of the bubble of 2017-18, we cannot rule out reflation of the bubble, analogous to the event of late 1998-2000. Given that valuation is still high, our advice, consistent with our portfolio positions, is to continue to own as little U.S. equity as career risk allows.

Protection from Bubbles

GMO recommends minimizing one’s exposure to U.S. equity markets. Their logic being that if the U.S. stock market bubble does pop, one may lose much of their portfolio’s value. Furthermore, if one did not buy in before the bubble took off – back in the QE days – then stay away. It may seem difficult to ignore the clamor of a rising market, but the risks of buying into the market this late in the game far outweigh the possibility of any rewards.

Some wise sage advice is to not just buy low and sell high, but to follow and do as the rich are doing. Many of the rich are exiting the U.S. equity markets and seeking refuge elsewhere for their investments. Either emerging markets with limited exposure to U.S. dollars, real-estate, and a subset of select commodities including gold; yes, gold.

Billionaire Buys Gold For the First Time

For the first time ever, billionaire Sam Zell – the 77 year old founder and chairman of Equity International, a private investment firm focused on building real estate-related business in emerging markets, is buying gold.

For the first time in my life, I bought gold because it is a good hedge.

As has been noted in previous writings, every major financial player is buying gold. Countries from China to Russia, EU central banks and banks such as JP Morgan-Chase are all buying physical – not paper gold certificates – but physical gold.

Zell points out that mining companies are not focused on exploring for new gold. The gold output of existing gold mines is down dramatically compared to the numbers of the past. Instead, many mining companies are taking advantage of the current landscape and buying out their competitors.

For example, Barrick Gold and Randgold Resources combined in an $18.3 billion dollar deal that created the world’s top gold miner by value and output. Meanwhile, just last week, Newmont Mining Corp. announced it was buying Goldcorp, Inc. in a $10 billion dollar deal resulting in a merger that will “create an unmatched portfolio of operations, projects, exploration opportunities, reserves, and people in the gold mining complex.” [3]

So, for Zell, this all goes back to the old law of supply and demand. Not only is gold a real hedge against downturns in the market – as it is real money – it has the likelihood of increasing in value (in relation to fiat currencies) from this drying-up supply.

Go back to supply and demand. Supply is shrinking and that is going to have a positive impact on pricing. The amount of capital being put into new gold mines is almost nonexistent. All of the money is being used to buy up rivals.

Gold Outperforms S&P 500

Despite talk of inflating bubbles and the bull market reaching new highs, the real winner all this time has been gold. Not only is gold a good hedge, but it has outperformed the S&P for over 2 decades. Want the proof? [4][5]

If you look at December, the S&P 500 dropped 9.18%. Gold went in the other direction, gaining 4.93%. And that was even with the headwinds of a Fed rate increase in December that conventional wisdom would signal should have pushed the price of the yellow metal down. (This data was gathered by Forbes. [6])

The fact that gold outperformed the S&P 500 in Q4 may not come as any shock. But it might be surprising to know that gold actually outperformed the stock index over the entire year. The price of gold dropped quite a bit in the spring, but overall, the yellow metal still ended 2018 ahead of the S&P500. Gold ended 2018 down 1.55% on the year while the market was off by 6.24%. [5]

Believe it or not, this trend can be extended out even further. Despite what most people consider a stock market boom over the last couple of years, gold has outperformed the S&P 500 since the turn of the century. Gold is up 345.39% since Dec. 31, 1999, versus a 70.62% increase in the S&P 500. [5]

Here’s the thing. This really shouldn’t come as a surprise. Gold has historically had a strong negative correlation with the stock market and it has long been considered an important hedge in an investment portfolio. As the saying goes, the proof is in the pudding.

As always, one should always do their own research. This is not investment advice though it is common knowledge that one should always allocate at least 10% of their portfolio in gold to hedge against any potential downturns the market may throw one’s way. As long as the U.S. dollar remains a fiat currency, there will be bubbles that are created due to Keynesian economic strategies and gold will always survive to tell the tale. Stay informed.

]]>https://cloudofdoubt.com/2019/01/the-bastardization-of-u-s-equity/feed/0Electoral College Eliminationhttps://cloudofdoubt.com/2019/01/electoral-college-elimination/
https://cloudofdoubt.com/2019/01/electoral-college-elimination/#respondFri, 04 Jan 2019 15:00:05 +0000http://cloudofdoubt.com/?p=1320Despite Congress’ grumblings for change and cries of “injustice” in the name of election fraud and manipulation, remember what the Electoral College is, why it exists, how it truly works, and why it is still important regardless of the “it’s just another antiquated relic held over from the Founding Fathers” rhetoric.

Upon Congress returning to session after the New Year 2019, Americans are confronted with a bill many will consider a slap in the face. Representative Steve Cohen (D-TN) introduced a bill Thursday to eliminate the Electoral College [1].

Many perceive the Electoral College as an antiquated mechanic of the U.S. federalist system which has decided the fate of one too many presidential elections where the winner of the popular vote did not win. Cohen believes, “Americans expect and deserve the winner of the popular vote to win office. It is past time to directly elect our President and Vice President.” [1]

While it is understood why Cohen feels this way, it is crucial to understand and point out the flaws in his reasoning. To do this, one must understand how the Electoral College works and why the Electoral College exists in the first place.

How Does the Electoral College Work?

When a voter steps into a ballot box, they are not directly casting their vote for a particular candidate. Instead, they vote for fellow Americans called electors. These electors, who are appointed by the states, are “pledged to support the presidential candidate the voters have supported.” [3] The electors hold their vote much later after the official election; the Monday after the second Wednesday in December following the election, to be exact.

The Constitution states:

Each state shall appoint, in such manner as the legislature thereof may direct, a number of electors, equal to the whole number of senators and representatives to which the state may be entitled in the Congress.

The total number of electors – and thus electoral votes – for the whole U.S. (including the District of Columbia) adds up to 538. Therefore, the winner must receive a majority of at least 270 votes to become president.

Why Does the Electoral College Exist?

The Founding Fathers created the Electoral College after much debate and compromise. As one of The Heritage Foundations legal experts, Hans von Spakovsky, noted in a paper on the Electoral College [2]:

In creating the basic architecture of the American government, the Founders struggled to satisfy each state’s demand for greater representation while attempting to balance popular sovereignty against the risk posed to the minority from majoritarian rule.

The Founders sought a way to empower the democratic elements of the American system without providing key areas of weakness that pure, unrestrained democracy had brought down upon great republics of the past.

The Founders were students of ancient history who understood and desired to prevent the destructive passions of direct democracy. Furthermore, as former subjects to an overreaching monarch, they equally feared the rule of an elite unresponsive to the will of the people.

They toiled over a variety of issues, including the indirect vote through intermediaries, at the 1787 Constitutional Convention.

In the end, the Electoral College was justified as providing the balance that states desired while also providing as part of a stop-gap to potentially reverse the popular vote had the populace somehow elected a criminal, traitor, or otherwise unfit-to-serve person. The Electoral College was a compromise, neither fully democratic nor aristocratic. [3]

Why Is the Electoral College Important?

Knowing that the Electoral College was a compromise between the states and an avenue to divide democratic and aristocratic philosophies – to end up in the federalist realm – why is it important today?

The system forces candidates who run for office to appeal to rural areas and smaller states. This is so that densely populated areas and states do not run away with an election, overriding the desires and needs of other areas. Farmers in Iowa likely have vastly different concerns than say bankers in New York. The federalist mechanic of an Electoral College takes these obstacles into account.

If the president were elected by strictly a popular vote, small and rural states would become irrelevant. Campaigns would ignore them altogether and spend much of their time and resources in large, populated areas. Does this sound fair?

It is up to the states – as it is a state’s right – to freely select the method in which they choose their electors. When the Electoral College was first instated, states chose to have their legislatures pick the electors, rather than the people directly. Over time, the paradigm shifted so that states often pick their electors based on the state’s popular vote. And since the Civil War, every state has opted for this “popular election” method of choosing their electors. [3]

There has been much criticism of the Electoral College because many feel that if the people elected a candidate to be president, then that is the person who should win, bar-none. Yet, one must ask themselves how radically different would the U.S. be if the Electoral College did not exist?

For starters, Abraham Lincoln – who secured less than 40 percent of the popular vote – would not have been president if he had not won the Electoral College in a landslide with 180 electoral votes instead. The North had many more people than the South and therefore, the control of the Electoral College. As a result, he was able to dominate the Northern states without gathering a single Southern state. [4]

The U.S. election system, with the aid of the Electoral College, has over 200 years of success. Changing a process that is not broken – simply for the sake of emotional swings – could easily destabilize one of the steadiest political systems in the world.

As author and Texas lawyer Tara Ross wrote in a Heritage Foundation memorandum [5]:

America’s election systems have operated smoothly for more than 200 years because the Electoral College accomplishes its intended purposes. America’s presidential election process preserves federalism, prevents chaos, grants definitive electoral outcomes, and prevents tyrannical or unreasonable rule. The Founding Fathers created a stable, well-planned, and carefully designed system—and it works.

Conclusion

When it comes to elections, “Americans should appreciate the great and long-lasting constitutional tradition bequeathed to them—including the quirky Electoral College system created by the nation’s Founders.” [3]

Despite Congress’ grumblings for change and cries of “injustice” in the name of election fraud and manipulation, remember what the Electoral College is, why it exists, how it truly works, and why it is still important regardless of the “it’s just another antiquated relic held over from the Founding Fathers” rhetoric.

For critics out there who continue to believe in the abolishment of the Electoral College, ask yourself a few questions:

Will direct elections really reduce the likelihood of disputed elections? Will they provide presidents with clearer mandates? Will they reflect the “will of the people” rather than the machinations of hired guns? And will they preserve the federal principle that is at the heart of the constitution?

]]>https://cloudofdoubt.com/2019/01/electoral-college-elimination/feed/0The Most Wonderful Timehttps://cloudofdoubt.com/2018/12/the-most-wonderful-time/
https://cloudofdoubt.com/2018/12/the-most-wonderful-time/#respondMon, 24 Dec 2018 17:34:36 +0000http://cloudofdoubt.com/?p=1313I wish everyone a blessed and Merry Christmas with friends and family. I wish you a Happy New Year and that each day is better than the previous. Thank you to those who continue to make the world and the U.S. a better place to live and for me to have the ability to live free and happy. I will see you all on the other side in 2019.

I know it has been quite some time since the last post and for this, I apologize. The last couple of months have been a whirlwind and time just got away from me. I wanted to take some time to wish everyone a Merry Christmas and a Happy New Year. Thank you to all of my followers and subscribers who have read, shared, donated, and contributed to Cloud of Doubt this past year. Your support means the world to me.

First: PC

When it comes to the holiday season, it seems that Political Correctness (PC) always rears its evil head. An innocent “Merry Christmas” turns into an “all hell breaks loose” scenario for no reason at all. When someone wishes another “Merry Christmas,” it is not slander to those who are not Christian. It is a simple gesture to wish another person – regardless of religion, faith, or belief – that they have a great time with family and friends and enjoy the current season.

It is not intended to put one another down nor is it meant to make one feel guilty. When someone wishes you a “Merry Christmas,” simply smile, thank the person, and carry on. Whether you believe or not, it does not matter. The meaning is inferred; they only wanted to spread the season’s cheer and happiness with you.

Second: The Most Wonderful Time

For many, winter and Christmas time are their favorite times of the year. They enjoy gift-giving, being surrounded by friends and family, looking at the lights, and singing songs. There is a reason the songs are so cheerful and express: “It’s the most wonderful time of the year.” However, it is important to recognize that for some, it is not the most wonderful time of the year.

Some are filled with sadness, anxiety, and/or unmatched emotions. Some simply want to be left alone while others resent the holiday spirit altogether. This is – and should be – understandable. Not everyone’s life is ‘unicorns and rainbows’ despite the happiness that surrounds them.

These people do not want or need to be coddled or reprimanded; they are simply handling the situation the best they know how and the way they want to handle it. Of course, there are exceptions to this, there always are, but do not give someone a hard time if they are not as cheerful as you.

Be a friend, a close family member, a decent human being. Only you can control how you feel and cannot force others to feel a certain way. Do what makes you happy. Whether you see this time of year as “the most wonderful time of the year” or a “pit of sorrow and despair” know that the time will be short. Enjoy it to its fullest extent or bear through it, but either way, take it in stride. Each day is a new start to continue on your journey so make the most of it.

Third: Remember Those Who Can’t Be Home

While we are surrounded by Christmas song and holiday cheer, we often forget those who have made that possible for us.

Those in the military who are stationed away from family who must partake from afar. Or those who have fought and died preserving our freedom to be safe, travel, and be merry. Those police officers and firefighters on duty patrolling the streets to ensure safe travels and deterring criminals. Those paramedics, EMT, nurses, and doctors saving lives because the world keeps turning despite a holiday.

Take a moment to thank those who serve the country and ones’ communities. While some are closer to home than others, they all sacrifice to provide a freer, safer, and livelier place to live.

With that said I will close out for now. I wish everyone a blessed and Merry Christmas with friends and family. I wish you a Happy New Year and that each day is better than the previous. Thank you to those who continue to make the world and the U.S. a better place to live and for me to have the ability to live free and happy. I will see you all on the other side in 2019.

]]>https://cloudofdoubt.com/2018/12/the-most-wonderful-time/feed/0Market Fragility Index: A New Economic Indicatorhttps://cloudofdoubt.com/2018/10/market-fragility-index-a-new-economic-indicator/
https://cloudofdoubt.com/2018/10/market-fragility-index-a-new-economic-indicator/#respondSun, 21 Oct 2018 14:00:17 +0000http://cloudofdoubt.com/?p=1287The Market Fragility Index combines the Buffett Indicator with margin debt. By combining these two crucial and telling inputs into one measure, it can indicate the magnitude and tenuousness of the stock market bubble.

The Market Fragility Index presents a look at how “out of whack” the stock market is compared to the rest of the economy as well as how big the cracks are in the foundation of the economy.

Before defining the new index, one may need a primer to understand exactly which metrics it is composed of.

GPD and Stock Market Capitalization

Gross Domestic Product (GDP) is the total size, or value, of the economy.

Stock market capitalization is the total size, or value, of the stock market.

When these two figures are plotted, like in the graph below, one may notice a few things.

The overall size of the US economy has generally always been on the up and up. The United States has continually increased its economic output (albeit a few exceptions).

The stock market’s value always flows up and down – a characteristic of the Keynesian style of economics within the US. These are the booms and busts of the economy manipulated via monetary and fiscal policies; as well as natural and man-made disasters i.e. hurricanes and war, respectively.

The last two greatest recessions in recent past, the tech bubble popping in the early 2000s and the Great Recession of 2007/2008, occurred when the stock market was heavily overvalued.

There is no reason the stock market should be so dramatically overvalued compared to the economic output of the United States. To give a better representation of these two metrics, enter the Buffett Indicator.

The Buffett Indicator

Warren Buffett, the most famous and one of the world’s wealthiest men, became so simply by investing. He has claimed that one of the best ways to know if the market is overvalued or undervalued is to look at the ratio of the stock market capitalization to the GDP (presented below).

According to Buffett, a ratio of 70% to 80% often presents a buying opportunity, while a ratio moving above 100% indicates a correction could be in store in the near future. [1]

If one were to divide the stock market capitalization for a given quarter by the same quarter’s GDP, it would yield the percentage corresponding to the Buffett Indicator. Notice that Buffett’s 80% threshold seems to hold true in that once that threshold is crossed, it is time to lay off buying and perhaps look for a good selling point to exit the market.

(Stock Market Capitalization) / (GDP) = %

Historically, each time the Buffett Indicator has surpassed the 100% threshold there has inevitably been a crash; and within this past decade, the US has ventured dangerously far into uncharted territory. This indicator simply demonstrates that many of the individual stocks are overvalued and seemingly are in a bubble. This makes the stock market top-heavy compared to the rest of the economy.

Margin Debt

Put simply, margin is leverage within the stock market; the ability to buy more stock than one can afford.

Example: One opens up a trading account and the brokerage house may let that person borrow against the funds deposited. Meaning, one may put 20% down and they could buy 5 times more stock than that person could afford; yielding a 5-to-1 leverage. If the stock goes up 10%, that person would make 50%. And if the stock goes down 10%, that person would lose 50%.

The above example can be exacerbated once the inner trading-houses of the banks and brokerages start to get involved. What many banks do is leverage people’s deposits for their own gain. Consequently, these brokerages receive better margin rates in that they can leverage much more than typical traders because “they know what they are doing.”

Example: Lehman Brothers was leveraged 30-to-1 before they went belly up, triggering the global financial crisis of 2008. This means that they only needed to put 3% down; but, if their investments went down just 3.3%, they were completely wiped out. And that is exactly what happened.

So why is all of this margin debt talk important? Isn’t what happened in 2008 in the rear-view and since been fixed? Well, the long and short of it is no. Though it is not an “end-all, be-all” indicator to the health of an economy, it is important to understand what it is. Additionally, it is part of the vulnerability index soon to be explained.

Opt-Out of Margin?

In the past, when someone wanted to open a trading account with a brokerage firm, that person had to qualify and opt-in for the ability to add and use margin within their account. That ensured that the person understood the full risk in using margin and had the funds/means to pay the debt back if that person made a bad trade.

In today’s world, however, that seems to no longer be the case. One is seemingly automatically qualified for margin, short-selling, etc. Furthermore, the applicant is no longer presented with the risks entailed by margin and are forced to seek education elsewhere. This means that more people have the ability to use debt to purchase stocks in record number without fully understanding the repercussions of doing so.

And what repercussions would those be? Well, depending on how bad a trade was, that person’s auto, house, savings/checking/retirement accounts, etc. could be subject to confiscation in order to pay the debt. They have the right to take all of the above from someone until the debt is repaid because that person was gambling. So these brokerages are now encouraging this type of behavior. Despicable.

The Numbers

From the graph below, it is easy to see that investors, consumers and banks alike, have not learned their lesson. Margin debt is at an all-time high – nearly 1.5-times what it was at the peak of the Great Recession.

Margin Debt to GDP Ratio

Sometimes people like to view margin debt as a percentage to GDP (given below). Again, one can see that this percentage has never been higher. The fact that margin debt is valued at nearly 3% of US GDP is quite mind-blowing.

Margin Debt and Real Growth

Another relationship with margin debt is when it is compared to the “Real Growth” of the economy as shown by Advisor Perspectives (below). [3]

The next chart shows the percentage growth of the two data series from the same 1997 starting date, again based on real (inflation-adjusted) data. We’ve added markers to show the precise monthly values and added callouts to show the month. Margin debt grew at a rate comparable to the market from 1997 to late summer of 2000 before soaring into the stratosphere. The two synchronized in their rate of contraction in early 2001. But with recovery after the Tech Crash, margin debt gradually returned to a growth rate closer to its former self in the second half of the 1990s rather than the more restrained real growth of the S&P 500. But by September of 2006, margin again went ballistic. It finally peaked in the summer of 2007, about three months before the market.

To Advisor Perspective’s credit, they share the same conclusion about margin debt. That it is important and may be a “leading indicator” to ascertain fallacies within the economic market, but the metric cannot be read in real-time (meaning it is published weeks old) and is simply not reliable enough [3]:

Margin debt data is several weeks old when it is published. Thus, even though it may, in theory, be a leading indicator, a major shift in margin debt isn’t immediately evident. Nevertheless, we see that the troughs in the monthly net credit balance preceded peaks in the monthly S&P 500 closes by six months in 2000 and four months in 2007. The most recent S&P 500 correction greater than 15% was the 19.39% selloff in 2011 from April 29th to October 3rd. Investor Credit saw a negative extreme in March 2011.

Margin Debt to Stock Market Capitalization

Mike Maloney was interested in the percentage of margin debt there was relative to the stock market capitalization value. One can see that this relationship peaked during the Great Recession around the 2.25% mark.

It is guessed many will say, “2%? That’s nothing.” But one must remember, that even if consumer margin debt is ignored, the banks are the real players at the table. The typical investor has maybe 5-times leverage; whereas the typical bank has 20-times leverage (conservatively).

This means, that in the worst case scenario if brokerage houses held all of the margin debt, that could be nearly 40% of the stock market. Could one imagine? A stock market valuation with nearly 40% consisting of debt – err gambling. Again, that is the worst case scenario, but these are conservative numbers as well (remember, Lehman Brothers were 30+ times leveraged) and it is true that banks/brokerage firms hold the majority of margin debt.

However, that does not give the typical investors a pass. It is because of novice investors and the automatically added margin to brokerage trading accounts that exacerbate this problem. Unlike managers who use hard numbers and facts to make their decisions, novice traders are simply gambling (in every sense of the word) in the “high times” of the market; the emotions of greed and fear. This could mean that in the next crash (or major correction) those brokerages are going to be taking a lot of cars, homes, and other accounts.

As an analyst, Maloney noted that because the range of this graph was approximately [0.7%, 2.25%], that it would make a great multiplier to a previous relationship to better incorporate these three discussed metrics (GDP, stock market capitalization, and margin) to arrive at what he has deemed the Market Fragility Index. [2][4]

Market Fragility Index

So what has been learned up until this point?

Individual stocks are in a bubble.

The stock market as a whole is overvalued. It is top-heavy compared to the rest of the economy.

Margin debt is a factor propping up the stock market. It is like cracks in the foundation of the stock market.

The Market Fragility Index is an attempt to weigh how top-heavy the stock market is and how big the cracks in the foundation are. As was noted earlier, the Buffett Indicator may indicate when the stock market is overvalued, but it fails to indicate how fragile and vulnerable it may be to a collapse. [5]

The Market Fragility Index combines the Buffett Indicator with margin debt. By combining these two crucial and telling inputs into one measure, it can indicate the magnitude and tenuousness of the stock market bubble. [5]

To better understand the index, Maloney included color-coded tier indicators.

It can be noted that the current stock market situation is seemingly the most fragile it has ever been in recent history. According to Maloney’s indicator, the stock market now presents a “threat to the global financial system” much like during the Great Recession and Tech Crash.

For some, this amount of historical data may not be enough as there are only 2 major peak-and-valley groups with another one emerging. Yet, every time the indicator has gotten this high, there was a severe financial, economic, and/or monetary crisis just around the bend. The stock market is “more fragile now than at any time in history. It’s not just top-heavy; the combined amount of leverage and lofty valuations we have today exceed even those of 1929.” [5]

While many will clamor “doom and gloom” or “the boy who cried wolf,” it very well may be. No one can predict the market with any degree of certainty other than to say a bust/crash/recession will happen – it’s simply the nature of the Keynesian style of economy the U.S. maintains. The current U.S. economy has been in its longest expansion in history and it cannot last forever.

It never hurts to prepare one’s self and family for a rainy day. It is better to be too early than too late. Protect the wealth one has worked so hard to attain and as always: stay informed.

Just days before Congress’ vote on whether to accept or reject President Trump’s nomination of Brett Kavanaugh for Supreme Court Justice, everyone was thrown a Ford-curveball. After over 30 hours of testimony, thousands of pages of records, FBI investigation and background material, judicial descents, and more, Democrat Dianne Feinstein let slip the unfounded claim by Christine Blasey Ford that Kavanaugh attempted to sexually assault her in the 1980’s. Feinstein had this information for well over 4 weeks but did not disclose it (ergo let it slip into the media’s, and thus, public’s hands) until there was a possibility of it glimmering a chance of political gain.

This accusation surfaced on the brink of the congressional vote; which many are referring to as an attempt to stall that vote. Not only does this accusation serve as an effort to slander Kavanaugh’s reputation and career, but it has also been perfectly timed with midterm elections in an effort to boost Democrat’s fervor. What is most troubling about this whole ordeal is that one would use the nomination process not only for political gain but for further dividing the country along party lines (Republicans and Democrats) – as if the United States isn’t already polarized enough.

It goes without saying that sexual assaults are egregious acts and should not be protected or covered up. However, it seems this is a common tactic in today’s world of politics – taking a page out of Alinski’s Rules for Radicals: win by whatever means necessary. A political opponent starts to make headway in an electoral race or on an issue and out of the woodwork comes a slanderous or libelous statement indicating that person has committed an act such as sexual harassment, assault, or otherwise.

The unfounded (often presented with zero cold, hard facts to prove one way or the other) claim then throws the entire issue or race out the window and media focuses purely on that accusation. It no longer becomes an issue of facts and substance but leads to a drumming up of emotional appeal based on hearsay. It becomes a “he-said, she-said.” Whether the act is proven true or false, the accused’s career and race is over; whatever lead or prestige they did have sinks to nothing and all is lost.

As a case in point: Ford’s allegation that Kavanaugh attempted to sexually assault her back in the 1980’s. Why now, after nearly 30 years since the incident is she finally coming forward? Why was no report filed against him when he became a federal judge in the past before it even got to this point? Feinstein knew about the incident weeks ago, but why did she not present it when she first knew about it? Could it be there was no evidence to substantiate the claim? Could it be that Feinstein was holding onto this claim for political purposes; waiting for the procedure to near its conclusion and then throw it as a wrench to bring the procedure to a screeching halt? What are the facts surrounding the accusation?

Jim Holt recites the facts around the current situation as it is known at this time, albeit without the sworn testimony of either Ford or Kavanaugh:

There are no witnesses who have confirmed Ford’s accusations.

Patrick Smyth, a former high school classmate of Supreme Court nominee Brett Kavanaugh, has denied attending the alleged party where Christine Blasey Ford says Kavanaugh attempted to sexually assault her in the 1980’s.

Ford cannot remember the location, how she got there, who she was there with, or how she got home. All four witnesses Ford claims were there deny being there and claim no knowledge of the incident. Furthermore, Ford was drunk and thus, her judgment and likely her memory was impaired leading one to believe there is, in fact, reasonable doubt with her claim. What makes her so certain it was Kavanaugh and not one of the other boys at the event?

Despite the above, one cannot inextricably say that the incident did not happen, but one can say there appears to be zero evidence to the contrary. It is purely a “he-said, she-said” at this point, and logically, and judiciously, an unfounded claim. That does not mean, however, that the incident did not happen as Ford has claimed. Victims do deserve to be heard and their side of the story should be told; which is why the committee asks for her testimony. Yet, to come forward with such a claim without a burden of proof to legitimize the claim is nothing short of hearsay.

What should cause the most outrage of this entire situation is the fact of how Ford’s lawyer’s demands are affecting the whole ordeal. Not only have Republican’s given multiple extensions to allow Ford the ability to give testimony, but Ford’s lawyer has also continuously thrown the committee’s kindness back in their face. Ford’s lawyer has finally confirmed to an open hearing at 10 A.M. on Thursday but she still affirms that Kavanaugh gives his testimony on the event first.

In what sense of judicial upholding and due-process does this demand make any sense? In no case has an accused person been required to testify against accusations without knowing the premise or circumstances outlined by the prosecutor. There are no details for Kavanaugh to refute other than that the incident did not happen. This is political lunacy at its finest.

Alan Dershowitz, Harvard law professor emeritus, outlines it best:

Every civil libertarian in the country, liberal, conservative, Republican, Democrat, led by the Civil Libertarian Union should be outraged by this demand. It is so un-American.

You’re the accuser. You get on the witness stand. You testify. You make your accusation. You get cross-examined. THEN the accused responds.

It turns the entire legal system on its head. It is INSANE to ask an accused person to deny the accusation before he has heard the accusation being made and cross-examined.

Sure, the FBI should continue its background check.

It should also call everyone else who may have been at this party.

All of that is true.

But the idea that he goes first? I want to hear from the American Civil Liberties Union. Where are they? This is the most fundamental denial of due process.

What is most egregious about this whole situation is not the fact that the claim was held until the very end – a typical Democrat approach to issues they are losing – but the fact that they ironically want a judge to go against himself and throw due-process to the wind. Not only is this ridiculous but this sets a sad and dangerous precedent going forward.

Regardless, testimony on both sides should be given to hopefully clear the air and bring the issue to a close, whatever the outcome may be. Who knows, Kavanaugh may be guilty…but he is presumed innocent until proven otherwise…at least that is how it should be.

]]>https://cloudofdoubt.com/2018/09/the-kavanaugh-fiasco/feed/010 Years Later – No Lessons Learnedhttps://cloudofdoubt.com/2018/09/10-years-later-no-lessons-learned/
https://cloudofdoubt.com/2018/09/10-years-later-no-lessons-learned/#respondTue, 04 Sep 2018 21:48:41 +0000http://cloudofdoubt.com/?p=1254The past month or so has been quite a period of reflection; personally and in the eyes of my country and countrymen. There have been times when faith in humanity has been restored and yet, in the same instant, a gigantic face-palming moment comes back to even the “score”. From draining the swamp to banning […]

]]>The past month or so has been quite a period of reflection; personally and in the eyes of my country and countrymen. There have been times when faith in humanity has been restored and yet, in the same instant, a gigantic face-palming moment comes back to even the “score”. From draining the swamp to banning straws. From picking the best American to serve as the Supreme Court Justice to Nike choosing the worst candidate to lead its new advertising campaign. This truly has been a period of ups and downs worse than the market economy behind the scenes.

While taking a step back to relieve my head of thoughts and hope for a breath of fresh air, someone comes along to offer the same sentiments as I in this regard quite clearly. After stumbling upon this work, I find myself taken aback. Has this person hacked into my mind? In debating on how to construe my thoughts into words, I find that it has already been done for me. I am therefore passing this along in hopes that it suffices and feeds those who also feel the same way.

A variety of investors provided capital to financial companies, with which they made irresponsible loans and took excessive risks. These activities resulted in real losses, which have largely wiped out the shareholder equity of the companies. But behind that shareholder equity is bondholder money, and so much of it that neither depositors of the institution nor the public ever need to take a penny of losses. Citigroup, for example, has $2 trillion in assets, but also has $600 billion owed to its own bondholders. From an ethical perspective, the lenders who took the risk to finance the activities of these companies are the ones that should directly bear the cost of the losses. – John Hussman – May 2009

This month marks the 10th anniversary of the Wall Street/Fed/Treasury created financial disaster of 2008/2009. What should have happened was an orderly liquidation of the criminal Wall Street banks who committed the greatest control fraud in world history and the disposition of their good assets to non-criminal banks who did not recklessly leverage their assets by 30 to 1, while fraudulently issuing worthless loans to deadbeats and criminals. But we know that did not happen.

You, the taxpayer, bailed the criminal bankers out and have been screwed for the last decade with negative real interest rates and stagnant real wages, while the Wall Street scum have raked in risk-free billions in profits provided by their captured puppets at the Federal Reserve. The criminal CEOs and their executive teams of henchmen have rewarded themselves with billions in bonuses while risk-averse grandmas “earn” .10% on their money market accounts while acquiring a taste for Fancy Feast savory salmon cat food.

I find the cognitive dissonance and normalcy bias regarding what has actually happened over the last ten years to be at astounding levels. As someone who views the world based upon a factual assessment of financial, economic and global data, I’m flabbergasted at the willful ignorance of the populace and the ease with which the ruling class has used their propaganda machine to convince people our current situation is normal, improving, and eternally sustainable.

When confronted by unequivocal facts, historically accurate comparisons, and proof our economic system is unsustainable and headed for a crash, the average person somehow is able to ignore the facts and believe all will be well because some “experts” in the propaganda media said not to worry. Those who present factual arguments are declared doomers or conspiracy theorists. They are scorned and ridiculed for being wrong for the last ten years.

The vast majority of math challenged citizens in this country don’t understand the concepts of real interest rates, real wages, debt to GDP, deficits, national debt, or unfunded liabilities. As long as their credit cards are accepted and they can get that pack of smokes with their debit card, all is well with the world. They’ve been convinced by the propagandist corporate media machine that acquiring stuff on credit makes them wealthier. They think their wages are increasing when they get a 2.5% raise, when they are falling further behind because true inflation exceeds 5%.

Their normalcy bias keeps them from grasping why their credit card balance rises even though they have slightly higher pay. They actually believe bloviating politicians when they declare we have the best jobs market in history. Suddenly, formerly skeptical conservatives who rightly believed the government drones at the BLS and BEA cooked the books to make the economy appear better than it really is, believe Trump’s declarations based on the same data. Root, root, root for your home team. Why let facts get in the way of a good story?

The President says this is the best economy in “15 years”. Kudlow says we’re in a “boom”. But in the first 18 months of the Trump presidency, private nonfarm payrolls averaged 190k, the same rate of job creation in the last 18 months of the Obama tenure. – David Rosenberg

The unemployment rate was falling during Obama’s entire presidency and has continued to fall under Trump. It’s the same story. In order to keep up with the demographic growth of the labor market we need to generate 200k new jobs per month. But even though we’ve added less than 200k per month for the last three years, the unemployment rate has fallen because the BLS drones say a few million more working age stiffs have willingly left the labor force, bringing that total to just below 96 million people with their feet up on the couch watching The View.

They must be living off their non-existent savings and accumulated wealth. The cognitive dissonant masses, who believe the BS peddled by CNBC, etc., don’t seem to question why their real wage increases have ranged between 0% and 1% since the Trump reign began (it was 2% during Obama’s last two years). Real wages couldn’t be falling if the unemployment rate was really 3.9%. But, why spoil a good narrative with inconvenient truth.

With stagnant real wages since the Wall Street created financial crisis, a critical thinking person might wonder how an economy whose GDP is 70% dependent on consumer spending could grow for the last nine years, with corporate profits at all-time highs, consumer confidence at record highs, and the stock market at record highs. The Deep State/Ruling Class/Powers That Be or whatever you want to call the real people pulling the strings behind the curtain boldly assumed their propaganda machine and the years of dumbing down the populace through their public education system could convince the American public to utilize cheap plentiful debt to re-inflate a new bubble to replace their last criminal enterprise.

You would think after being burned with 50% losses twice in the space of eight years, the average American would have learned their lesson. Debt kills. Consumer debt, which collapsed under an avalanche of Wall Street write-offs (paid for by you the taxpayer) in 2009/2010, has regained all-time high levels and is accelerating as we enter this final phase of blow-off top euphoria. When the next inevitable financial collapse occurs these heavily indebted suckers will be blind-sided with a baseball bat to the skull again. It seems Americans never learn.

Total household debt topped out at $14.5 trillion in 2008 and proceeded to fall by almost $1 trillion as a tsunami of foreclosures swept across the land. But a funny thing happened on the way towards Americans approaching debt with the appropriate caution – QE1, QE2, QE3 and propped up Wall Street banks doling out loans to anyone capable of fogging a mirror and scratching an X on a loan document. The Deep State oligarchs realized the only way to keep their ponzi scheme economy afloat was to lure in more suckers with debt that could be re-circulated to make the economy appear solvent.

College students, after over a decade of government school indoctrination, were the perfect dupes. From 2009 until today the government has doubled student loan debt from $750 billion to over $1.5 trillion. Everyone likes a shiny new car, so the financial industry took auto lending from $700 billion to over $1.1 trillion over the same time frame. The re-ignition of the housing bubble, through Wall Street engineered supply suppression, has driven prices far above the 2005 peak in most major markets.

With household debt at record levels, real wages stagnant and being in the ninth year of economic recovery a positive sign for the future? Do you believe the Fed has conquered economic cycles and have eliminated recessions? Have we entered a new permanent prosperity paradigm? We’ve also heard about how corporations are swimming in profits (turbocharged in the last nine months by the Trump tax cuts). This narrative is used to resolve the excess stock valuation dilemma.

If corporations were swimming in profits, why have they added $2.5 trillion of debt above the pre-collapse high in 2008? It seems they have been incentivized to take on mountains of debt because the Fed inflicted ZIRP upon the economy. Did American companies use this debt to expand facilities, invest in new capital projects, or raise wages for their workers? Don’t be silly. They had a better idea.

In what passes for the normal exercise of crony capitalism in this warped deviant shitshow we call America, the biggest corporations in the world took the free money created by the Federal Reserve and proceeded to “invest” it in their own stock rather than investing it in their operations and workers. Borrowing at near zero rates and using the proceeds to buy back hundreds of billions of your own stock had multiple benefits for greedy feckless Harvard MBA CEOs. Reducing shares outstanding juiced their earnings per share, resulting in a false profit picture to investors, who bid their stock prices higher.

Corporate executives tied their compensation to stock performance and reaped extravagant salaries and bonuses. This same scenario played itself out in 2007 – 2009. These brilliant CEOs bought back a record amount of stock just before the financial collapse. Using their borrowings, along with Trump’s tax cut windfall, current day S&P 500 company CEOs are saying “Hold My Beer”. They are on pace to buy back $1.2 trillion of their stock at all-time highs. When stock prices are cut in half again, these greed monkeys will pay no price for their reckless stupidity. All of this idiocy has been aided and abetted by the Fed with their near zero interest rates a decade after the crisis supposedly ended.

The messengers for the Deep State, put forth on the propaganda news networks, are paid to spin the narrative that debt is under control, GDP is soaring, inflation is non-existent, unemployment is at record lows, and America’s economy has never been better. Despite retro-active upward adjustments to GDP and personal income by government drone agencies to obscure the truth, even the fake data reveals debt levels at extremely dangerous heights. U.S. corporate debt as a percentage of GDP is currently the highest in history.

Previous peaks occurred at the bubble peaks in 1990, 2001 and 2008, just before recessions hit. Due to Fed monetary recklessness, irresponsibility, and enslavement to Wall Street bankers, we now have an “Everything Bubble” consisting of stocks, bonds, commercial real estate, and housing market. With corporate and personal debt at record levels, rising interest rates, and a slowing global economy, the dominoes are lined up once again. If you don’t know what happens next, you’re the dupe.

If you think corporations and consumers have been on debt binge, check out what the rest of the world has done since 2007. There should be no disagreement the global financial catastrophe of 2008/2009 was caused by excessive un-payable debt creation by global financial institutions in conspiracy with the Federal Reserve, Washington politicians, and corporate America. Trillions in faux wealth was obliterated in a matter of months. Rather than learn a useful lesson from this orgy gone wrong, the shadowy figures in smoky back rooms decided the solution was ramping debt to levels never imagined.

Using “Big Lie” propaganda and central bank printing presses across the globe, they have managed to add $71 trillion of global debt in the last ten years, up 43% from pre-crisis levels. And the most mind-boggling aspect of this growth is that $42 trillion of the new debt was in emerging markets, up 200%. Venezuela, Argentina, and Turkey are considered emerging markets. No risk of contagion there. Right? Trying to solve a debt problem by creating far more un-payable debt is like trying to cure stomach cancer with a gunshot to the scrotum. How the average person can not see the insanity of these actions by their political and financial leaders is beyond my comprehension. Or am I the crazy one for questioning our ruling oligarchs?

In order to prop up the criminal banking cabal, the Fed, ECB and Bank of Japan took their balance sheets from less than $4 trillion in 2008 to over $14 trillion today – and still rising. Make no mistake, this “money” (debt) was created out of thin air by captured bureaucrats doing the bidding of bankers, billionaires and the rest of their Deep State cronies. Believing the false narrative this was done for Main Street USA is a sign of willful ignorance or pure stupidity, as proven by the following chart.

While central bankers have more than tripled their balance sheets and funneled the fantasy bucks to Wall Street banks and mega-corporations, virtually none of it trickled down to Main Street. The only trickle is the piss running down our backs from the ruling elite. The massive debt creation has been nothing more than a last-ditch effort to prop up the crumbling financial/political paradigm. The current state of affairs is unsustainable. It is failing. And it will fail. This turkey will ultimately hit the ground like a wet sack of cement.

Instead of doing the right thing and fund the tax cut through spending restraint, government expenditures have ballooned 10% in the past year. Treasury borrowing in July at $130 billion was the most ever outside the 2008/09 recession. – David Rosenberg

I voted for Donald Trump in 2016 because he wasn’t Hillary and he had voiced what I considered positive stances on economic and global issues. He ridiculed the government data regarding unemployment and inflation. He trashed Yellen and the Federal Reserve for creating bubbles with their recklessly low-interest rates. He railed against excess government spending and deficits. He declared the stock market was a bubble (7,500 Dow points lower than today). He had criticized our military involvement in Afghanistan, Syria and Iraq.

As we know, he got elected and proceeded to forget all of his positions from the campaign. His Supreme Court choices have been stellar. Reducing regulations and taxes is a good thing. Fighting the Deep State and his own intelligence agencies takes balls. And his contempt and ridicule of the fake news media is to be applauded. But his 180-degree reversal on rational economic stances and feeding the war machine has been disappointing and will ultimately contribute to the next financial crisis.

Does every new president get brought into a room where they are told what to say about the economy, or else? Mr. Concerned about government spending and deficits signed one of the largest tax cuts in history (mostly to corporate America) while simultaneously ramping up military spending and cutting absolutely nothing. The result is trillion dollar deficits for as far as the eye can see. The fake government data he once scorned, he now boasts about on a daily basis. It seems he now loves low-interest rates and bubbles.

He threatens the Federal Reserve Chairman about raising rates. Even though the stock market is 45% higher than when he declared it a bubble, he takes credit for its ascension to record highs. Saber rattling and threatening war around the globe is now par for the course. It seems Trump thinks he can run our economy like a NYC real estate mogul. He does have experience with bankruptcies. That may come in handy.

As a country, we’ve allowed our elected and unelected rulers to do the exact opposite of what should have been done in 2009. We allowed criminal banks who were too big in 2008 to get bigger and now, Too Big To Control. Not one criminal banker was jailed, despite proof of the greatest financial fraud in history. We allowed ourselves to become addicted to low-interest rate debt. We now view $1 trillion deficits as normal, when the highest annual deficit in history prior to 2008 had been $413 billion.

Ivy League-educated intellectual yet idiot financial experts argue a negative real Federal Funds rate during a “booming” economy is logical. Everything about our economic system and financial markets is abnormal. And whenever a sober-minded person questions this insanity, the spokesmodels for the establishment point to the record stock market as their proof all is well.

The arrogance and hubris of those who have benefited from Fed handouts and rigged market gains have reached epic levels. They’ve now convinced average Joes and Janes to venture into the markets at all-time highs. Equity exposure was only higher at the Dot.com peak. Consumer confidence is the highest since 2001. Irrational exuberance abounds. Whenever forthright honest financial analysts use factual historical data to prove stock valuations are at excessive levels, they are attacked and ridiculed for being wrong for the last decade. The old Wall Street adage that “being right but early is the same as being wrong” applies.

What the hubristic MBA stock trading savants fail to acknowledge is the longer this nine-year bull market goes, the closer to its demise. The unsustainable will not be sustained. Back in 2008, only 20% of market assets were passively managed through Index and ETF funds. That number now stands at 40%. This works well on the way up. It will create a cascading crescendo of selling on the way down.

I wonder how the 30-year-old big swinging dicks will handle that situation. To be confident about substantial upside at these levels is not rational, but whoever claimed Wall Street traders were rational? Reason and rationality will eventually assert themselves. Dark humor will have to sustain honest men for now.

If margins are 2x the norm, valuations are 2x the norm, and mean regression is still a force of nature, we are looking at an 80% correction. Of course, if an 80% correction whacks revenues, then it could start to get ugly. – Dave Collum

Those who continue to point out inconvenient facts about our economy and financial markets will continue to be branded doomers and conspiracy theorists. Scorn and ridicule will be the weapons used by the Deep State to undermine confidence in reality-based analysis. Newsletter writers and money managers will be accused of fear-mongering to attract subscribers and investors. I’m neither a newsletter peddler or investment professional. I’m just a dude who gets up every morning and drives to my job to support my family. I benefit in no way financially by taking a stand against the corrupt, lying, propaganda peddlers for the establishment.

The entire purpose of creating The Burning Platform was to inform those who wanted to hear the truth about our unsustainable financial, social and political systems. I’ve tried to do that to the best of my limited abilities for the last ten years. I’m frustrated because the majority have learned no lessons from the 2008/2009 catastrophe. The ruling class has double downed on the same policies and actions which created the disaster. Those in control may have successfully delayed the day of reckoning, but they have ensured it will be far worse than it needed to be.

We are only halfway through this Fourth Turning and the coming financial collapse will be the catalyst for the looming conflicts and clashes which will determine the future course of our country. If you choose not to acknowledge the inevitability of financial collapse and imminent conflict, you haven’t been paying attention. Lessons not learned in the past decade will be learned the hard way in the next decade. To paraphrase Mencken, they deserve to get it good and hard, and they will.

Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation and empire. The very survival of the nation will feel at stake. Sometime before the year 2025, America will pass through a great gate in history, commensurate with the American Revolution, Civil War, and twin emergencies of the Great Depression and World War II. – Strauss & Howe – The Fourth Turning – 1997

If you feel you’ve received some value from this article and this blog dedicated to free speech and truth in the face of lies, corruption and fake news, feel free to make a Donation to keep the lights on at The Burning Platform.

]]>https://cloudofdoubt.com/2018/09/10-years-later-no-lessons-learned/feed/0Spending Into Prosperityhttps://cloudofdoubt.com/2018/08/spending-into-prosperity/
https://cloudofdoubt.com/2018/08/spending-into-prosperity/#respondWed, 15 Aug 2018 20:12:34 +0000http://cloudofdoubt.com/?p=1241Not only is this policy of deficit spending unsustainable, it is likely to cause much grief and heartache to ordinary citizens across the globe. Life savings, retirement funds, etc. are all linked to this notion that one can spend their way into prosperity.

Can one spend their way into prosperity? Much attention has been given to the fact that jobs numbers are soaring, unemployment is the lowest it has been in recent history, and economic growth (GDP) is expected to continue its upward projection; yet, no one looks at the underlying situation as a whole: the entire economy is built on debt.

As an ordinary citizen, one can only amass so much debt before the debt becomes too burdensome. Either one hits the ceiling and lenders will refuse to loan additional funds, or the debt repayment surpasses the income one brings in. Either way, despite how much that person spends, they are in a perpetual state of digging a deeper hole for themselves. Sure, they may feel wealthy after spending all of that money, but the goods and services which were bought will lose value and all of the perceived wealth will come crashing down once the line of credit ends. Then it is back to the beginning…

The government, however, has a tool the ordinary citizen does not: the printing press. They can create or digitize all of the money they want. The only catch is that it will induce inflation and affect those who have worked hard to save and invest diligently. Upon which, goods and services prices will soar to keep pace with the cost of living and added inflation rates. Those who have consumed their debt limit will have nothing to fall back on.

As mainstream media and government entities praise the soaring economy and how “oh so great” it is doing, has anyone looked into the debt the entire economy is built upon? How much debt is really out there?

Consumer Debt

Debt amassed by consumers has continued to grow for the 16th consecutive quarter. According to the issue of Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York’s Center for Microeconomic Data, total household debt increased by $82 billion (0.6%) to 13.29 trillion in the second quarter of 2018. This marks $618 billion higher than the previous peak of 12.68 trillion from the third quarter of 2008. [1]

According to Reuters, consumer debts of all types have greatly increased [2].

The number of student loans grew to $1.41 trillion in the second quarter, up $61 billion from a year before.

Credit card loans climbed $45 billion from a year earlier to $829 billion.

Total mortgage debt rose to $9.00 trillion, up $308 billion from a year ago.

Many talking heads in the media attribute these raises to the booming economy, increases in jobs, and tax cuts; yet, these debt numbers were increasing well before any of those were in the works. They go on to say [2]:

The ongoing growth in home, auto, student and credit loans has been linked with a solid labor market.

The rise in indebtedness did not make it more difficult for borrowers to meet their monthly payments last quarter.

Furthermore, Wilbert van der Klaauw, senior vice president at the New York Fed, said in a statement [3]:

While overall delinquency rates have remained stable at relatively low levels, transition rates into delinquency have fallen noticeably for student loans over the past year, reflecting an improved labor market and increased participation in various income-driven repayment plans.

While this may be all “well and good” for the short term and in market confidence, the real question is: is this sustainable? No.

Corporate Debt

Corporate debt has topped $7.5 trillion surpassing 45 percent of GDP.

When looking at the corporate bond landscape, what was once an investment-grade ladder, is now rungs of “junk” and “crap.” How so? According to Danielle DiMartino Booth [4]:

Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion, according to Morgan Stanley. Put another way, BBB bonds outstanding exceed by 50 percent the size of the entire investment grade market at the peak of the last credit boom, in 2007.

This analysis indicates that a majority of U.S. companies are considered high-risk and are even labeled as “speculative” according to Moody’s [5].

When looking at the GDP graph above, the last time corporate debt to GDP ratio was this high was just before the 2008 crash, and before that, right before the tech bubble popped.

According to Bianco Research, 14.6% of S&P 1500 companies are zombies, meaning their earnings before interest and taxes fail to cover their interest expense.

Federal Debt

With the tariffs and tax cuts in full effect, the federal government continues deficit spending to make up for loose ends. The deficit, according to the Treasury Department numbers, is expected to grow to $833 billion in 2018, and $984 billion in 2019 – rocketing upward from $666 billion in 2017. [6]

Public debt now equates to over $121,000 per American household (2 adults). [7]

As interest rates continue to rise, servicing the federal debt and repayments becomes more and more expensive. According to the Congressional Budget Office, using a modest projected interest rate of 4 percent, payments on the national debt will roughly triple to $915 billion in 10 years. [8]

As a result of this projection, the cost of paying the annual interest of the federal debt will equate to the annual cost of Social Security spending within 30 years. Social Security costs already exceed income in 2018, three years earlier than expected. [9]

Furthermore, it is expected that the Social Security trust fund will be depleted in 2034, a year sooner than projected in last year’s report. If government deficit spending continues to grow out of control, the trust fund will be depleted well before 2034. [9]

The reason for this to be alarming, according to Bankrate analyst Taylor Tepper, is that “Workers should panic, but not because of the most recent Trustee report. Workers should panic because they aren’t saving nearly enough for retirement.” [9]

Global Debt

Gluskin Sheff, a prestigious investment manager, recounts that at the peak of the last credit bubble, the amount of US debt across household, business, and government totaled $27 trillion, or 225% of GDP. A decade later, it now stands at nearly $50 trillion, or 250% of GDP. [10]

Over the past year, the global economy has added $25 trillion of debt to reach a global GDP of 318%. [11]

According to the Wall Street Journal, global leveraged lending reached a new high of $1.6 trillion in 2017, surpassing the previous record in 2007. Many of these “leveraged loans” are considered covenant-lite, meaning there are fewer restrictions on collateral, payment terms, and level of income. In short, these loans are much riskier. [12]

Conclusion

It is easy to see the entire world economy, especially the US economy, is maintaining itself on life-support because of debt – it is one big Ponzi scheme. Everyone is lending to each other until eventually, the entire pyramid will topple over.

Not only is this policy of deficit spending unsustainable, it is likely to cause much grief and heartache to ordinary citizens across the globe. Life savings, retirement funds, etc. are all linked to this notion that one can spend their way into prosperity.

There is debt as far as one can see and this further exploding debt could blow the economy into a disaster the likes of which have never been seen. As VanEck from Seeking Alpha put it [10]:

Both US political parties have made it clear through their actions that they are not interested in reducing, or even stabilizing, the growth in debt. Likewise, voters are not willing to hold their leaders fiscally accountable. Without any adults in the room, we believe debt will continue to grow until it brings a crisis, just as sub-prime mortgages grew until 2008 when a crisis forced lenders and borrowers to stop. The difference now is that government debt is at the center of the current credit bubble.

]]>https://cloudofdoubt.com/2018/08/spending-into-prosperity/feed/0The Illusion of Economic Growthhttps://cloudofdoubt.com/2018/07/the-illusion-of-economic-growth/
https://cloudofdoubt.com/2018/07/the-illusion-of-economic-growth/#respondTue, 31 Jul 2018 15:00:41 +0000http://cloudofdoubt.com/?p=1232The illusion of economic growth persists while the U.S. has experienced one-quarter of inflated GDP growth, other sectors of the economy are taking a dip.

Trump celebrated the release of the GDP numbers Friday morning praising the 4.1 percent economic growth in the second quarter. The President called the numbers “amazing” and “very, very sustainable – this isn’t a one-time shot.” [1] While it is understandable that any President wants to tout a strong economy, this hyperbole is rather close to a fib.

To further exacerbate the situation, enter Donald Trump Jr. who demonstrated his inability to research. Looking past the vanity of his tweet, the claim that “Obama never broke 2%” GDP, even if he was being facetious, was a true face-palm moment. It is clearly seen in the chart below that Obama broke the 2 percent threshold a multitude of times.

Incredible numbers. I remember when “the experts” laughed about breaking 3%. Just because Obama never broke 2% doesn’t mean that someone with great policies can’t. Let’s keep this going. https://t.co/05LyLBw22j

First of all, to give credit, a 4.1 percent GDP growth is the highest percent change from a preceding quarter since the third quarter of 2014, as can be seen below. However, when looking into what comprises the GDP and its growth, one will find that it is a bit ‘flawed’ and not sustainable – at least from the improvements to the current catalysts.

The question that comes to mind is: if the US experienced just a little over 2 percent growth in Q1, how did it double in just one quarter? The tax cuts have fueled more stock buybacks, consumers are spending just as much as they were in previous quarters, and US production of goods has more or less flat-lined – so what changed? The answer? Tariffs.

Not only are tariffs ‘unsustainable’ in the long term, they are essentially a tax on the US citizens who buy goods other than American…but it’s not like the US produces the goods in which it imports. As a reference, just about everything in a Wal-Mart used to be all American made goods, now one would be lucky to find something made in America that is not in the hunting section. [2]

To explain this jump in growth in the GDP one can look to the exports. Net exports contributed 1.06 percent to the pace of growth in GDP (the most since 2013). This increase in exports was from businesses trying to export their goods, i.e. soybeans, before the tariffs are actually in place. This comes from the Commerce Department who said inventories dipped 1 percent (the most since 2014) attributing the dip to “soybean stocks as well as those of drugs and sundries and petroleum and related products.” [3]

Many economists believe this second quarter of substantial growth is simply just a one-off. Not only was the GDP “tricked” by the mad-shipping-rush to squeak by the tariffs, but the GDP is simply not the correct tool to gauge economic stability. One measure that is looked to is the ‘final sales to private domestic purchasers’ which exclude trade, inventories, and government overlays. More or less, it demonstrates the relationship between businesses and consumers without all of the cloudiness. But to be fair, that metric also grew at 4.3 percent – the second-fastest since 2014. [3]

So who knows? Maybe the economy is alive and kicking. Yet, there are a few areas which have not been talked about.

Dying Housing Market

For one, the slowing housing market. The U.S. new home sales fell to an eight-month low in June. Furthermore, the previous month of May’s data was revised to a much lower number. According to the Commerce Department, “new home sales decreased 5.3 percent to a seasonally adjusted annual rate of 631,000 units last month, the lowest since October 2017. May’s sales pace was revised down to 666,000 units from the previously reported 689,000.” [4]

The new-home housing market has been hit with rising building material costs – likely due to tariffs – and shortages of land and labor which increases the costs of new homes. These elevated prices along with rising interest rates deter buyers – and especially first-time buyers – from purchasing homes.

Existing housing sales have also been down due to their inflated prices throughout the country. In looking at California, one of the largest housing markets in the nation and often a predictor for the rest of the country has slowly and silently been crashing. According to CoreLogic, sales of both new and existing homes and condos have dropped 11.8 percent year-over-year all while prices are at record highs. “The median price paid for all Southern California homes sold in June was a record $536,250, according to CoreLogic, a 7.3 percent increase compared to June of 2017”. [5]

Deficit Continues To Grow

Despite Trump’s rhetoric in reducing the trade deficit regarding trade deals and tariffs the U.S. deficit continues to grow. Trump first instituted tariffs on steel and aluminum followed by a 25 percent tariff on $50 billion worth of goods. He further added fuel to the fire by ordering officials to identify another $200 billion in Chinese imports to receive additional tariffs of 10 percent with another $200 billion after that if China retaliates. [6] While Trump indicates that these measures will reduce the trade deficit, there has been little to show for it.

The U.S. deficit has grown $8 billion in the first quarter of 2018 to $124 billion or 2.5 percent of GDP. While the $8 billion may seem small when looking at the trade deficit as a whole, one can see that “in the first quarter of this year, the trade deficit grew by 15 percent compared with the same period last year, rising from $79 billion to $91 billion.” [7][8]

The only ‘positive’ which has been seen related to the tariffs, as indicated by the Bureau of Economic Affairs in a released statement, is that many U.S. multinational enterprises are bringing back home money parked in offshore accounts – which have been out of the U.S. for many years. Yet, whether that money is being used for further investment or simply being passed on to shareholders remains to be seen. [9]

Conclusion

So while the U.S. has experienced one-quarter of inflated GDP growth, other sectors of the economy are taking a dip. The culmination of increasing interest rates, added tariffs, and already inflated stock and housing markets have put pressure on the economic landscape – something will have to give.

What is frustrating about the whole situation is that as a whole, the economy has not changed that much between Obama and Trump. When candidate Trump was on the campaign trail he pointed and attacked officials regarding the economy. He blamed Obama, Wall Street, the Federal Reserve, and others as the cause for the stagnation in the growth and productivity of the United States. Yet, without much change and sluggish statistics with the exception of a few outliers (one-quarter of explosive GDP growth and lowering unemployment), Trump touts the economy is the greatest ever – also hyperbole.

Americans still experience low wage growth and now a taxation in the form of tariffs on the goods they buy. Why Trump is still not critical of the same things he was when he was campaigning is quite troubling. It is as if he tried to fight the system and then became one with the system – or he lied to the American people on the campaign trail by saying what was wanted to be heard. He is touting the same talking points he criticized during his campaign. [10] That strategy landed him the presidency and if he keeps it up, it is likely the Democrats will harness the same rhetoric in their platform for 2018 and 2020; this time blaming Republicans, tariffs, and trickle-down tax-cuts.

The Keynesian economic mindset is ruining the American economic engine.

]]>https://cloudofdoubt.com/2018/07/the-illusion-of-economic-growth/feed/0The Battle Between the President and the Fedhttps://cloudofdoubt.com/2018/07/the-battle-between-the-president-and-the-fed/
https://cloudofdoubt.com/2018/07/the-battle-between-the-president-and-the-fed/#respondTue, 24 Jul 2018 15:00:44 +0000http://cloudofdoubt.com/?p=1223The battle of two different agendas between President Donald Trump and Federal Reserve Chairman Jerome Powell has slowly commenced.

The battle of two different agendas between President Donald Trump and Federal Reserve Chairman Jerome Powell has slowly commenced.

On President Trump’s agenda, he outlines tax cuts followed by a lowering of the U.S. trade deficit subsequently triggering a trade-tariff war with the rest of the world. On Chairman Powell’s agenda, he urges to maintain dollar stability while portraying a booming economy by pulling the monetary and fiscal policy levers – presently the interest rate lever.

These two are setting the stage to blame each other should one agenda fail to be upheld.

Back in December 2017, President Trump managed to sign the Republican tax cut bill into law. It slashed corporate tax rates as well as shifted the tax brackets for individuals. It was touted that the bill would increase economic growth, create jobs, and raise wages. [1] All of which – save for the latter which is lagging behind – has come to fruition. Yet, while businesses and individuals get to keep more money in their pockets, the government has failed to reduce its budget accordingly; thus, continuing to rack up more and more debt. [2]

Furthermore, Trump has exerted his power which has consequently led to a trade war with China, Europe, and the rest of the world. His focus was that other countries need to “pay their fair share” as the U.S. has been over the barrel by numerous bad trade deals of the past. Though understandable, considering the United States is in a severely poor position when it comes to the trade record, it is those ‘bad deals’ which keep all goods and services – many of which are imported from the world producers – cheap and affordable to every day Americans.

What many fail to recognize is that the U.S. is not the good-producing machine it once was. Many companies have shipped the jobs overseas; not because it was simply cheaper, but because they were forced to by overreaching and overtaxing U.S. policies. The U.S. no longer has the infrastructure to produce at the scale it once could. Not to mention the workforce turning their noses up to that kind of work. A trade war will only cause prices of those imports to be much more expensive. While Trump sits at the top and worries about the fairness of trade deals, it is “we the people” who are taxed each time Americans walk into the store.

Another unforeseen consequence of the trade war is the effect of the currency manipulations other countries have instituted. In other words, the trade war has made the dollar strong. That might sound like a win but it brings with it unintended consequences. Japan and Europe continue to hold their rates at near zero values (much like the U.S. did only until recently). By holding rates at that level while the U.S. continues to raise rates, investors end up pushing the value of the dollar up against the yen and euro. In short, this makes U.S. products less competitive and more expensive for the rest of the world.

Now it appears that Trump is fighting a two-front war; not only with the policies of the Federal Reserve but the actions of those in the rest of the world of which he has no control.

The Federal Reserve has hiked the Federal Funds Rate five times since Trump took office in January 2017. It is expected they will continue to raise rates through the rest of 2018, but there are concerns. As DiMartino Booth told Bloomberg [3]:

Powell is giving some hints that the Fed may start to slow the pace of its tightening, as when this week he added the words “for now” to his description of the central bank’s plan to continue lifting rates. And while the Fed hikes gradually, it tends to cut rates quickly, as when it slashed rates from 4.75 percent in September 2007 to around zero in December 2008.

It is always a two-faced effect when dealing with interest rates. Rising rates indicate that the economy is doing better as there is more demand but less supply of money – the reason for the rate hike. Yet, much of Trump’s angst with the rising interest rates is that due to Trump’s trade war, the dollar’s strength has increased. While this dollar strength sits well with the Federal Reserve, it goes against Trump’s agenda for establishing a fairer trade deal.

The Federal Reserve must also keep inflation in check by pulling on various levers. With the previous era of cheap money and now the shrinking of the Fed’s balance sheet, adding rising interest rates to the mix only makes maintaining the balance that much harder for the Fed. Add to this equation pressure from Congress and the President and it can be thought that the Fed may eventually make a mistake and stumble…if not topple. Especially considering that the Consumer Price Index (CPI) reflects current prices – most of which are imports. This leaves the Fed questioning if the prices are rising due to the trade war, or if it is inflation creeping in.

For now, the President has let his thoughts be known in how he wishes to continue into the future but is not man-handling the Fed…yet. Trump said: “I am not happy about it. But at the same time, I’m letting them do what they feel is best.” [4]

The president’s attacks on the Fed’s rate increases and the recent strengthening of the dollar highlight an inherent contradiction at the core of his economic policies.

While he’s trying to bring down the U.S. trade deficit by slapping tariffs on imports, his tax cuts are boosting the federal government’s red ink, putting upward pressure on interest rates and the dollar.

It is felt that the Federal Reserve and President Trump should resolve their differences and maintain an agenda together. Each holding their own agenda underscores the divisibility of the two and subsequently pits one against the other. While each can point to the other as the cause for things ‘souring,’ both will come under heavy attack by Americans should the people be crushed by the failure of either the Fed or the President. It is always the citizens who bear the brunt of the misdeeds and oversights of the government.